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New Home Sales Hit Record Low, Impacting Factory Orders

Aug 25, 2010

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Reported by

Frank James

One of my favorite economics blogs, Calculated Risk has an interesting posting and chart sparked by terrible new-home sales numbers released today.

The chart shows what appears to be a tight correlation between sales of new homes and existing homes from 1994 and 2007.

For all those years, the two curves travel mostly together like jets flying in formation.

Then in 2007, the pattern breaks new homes sales falling at a much steeper rate than existing home sales. The separation between the curves has only grown since then.

Calculated Risk explains this by saying that the foreclosures on existing homes led to distress sales of same and that that new homes couldn't match those bargain basement prices. Sales of new housing won't recover until all that existing inventory is sold.

As you'd expect, home builders have responded by building fewer new houses. It's probably safe to assume that few builders are building "spec" homes these days as was true during the height of the bubble where the expectation of builders seemed to be "If you build it, they will buy."

According to the National Association of Home Builders, in 2006 before the bubble burst, builders constructed 1.4 million single family homes. Three years later in 2009, they built only 445,000.

And the July new-homes data released Wednesday makes that 2009 figure look relatively good by comparison, with July sales coming in at an annual rate of 276,000, the lowest rate on record.

Which helps to partly explain why durable goods were lousy in July as well. With so few new houses being built, the demands for, building supplies, appliances like refrigerators, washers and driers and the equipment used to make them is down.

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